Are You Losing Money by Staying Too Niche?

Niche businesses almost always originate from an identifiable need in the marketplace. They recognize an underserved segment of the population — whether that’s expectant mothers, pet owners, or cheese lovers — then develop a product or service to meet the specific needs of that customer base.

Marc Lore and Vinit Bharara did just that with Diapers.com. These two childhood friends saw how busy and exhausted new parents were and identified the need for a convenient way to purchase diapers. It worked. In 2010, Diapers.com brought in an estimated $300 million in revenue.

But for every Diapers.com, there are many more niche ventures that never quite get off the ground.

Know Your Total Addressable Market.

In the excitement of a new idea, many entrepreneurs often forget to ask themselves one very important question: “How big is my total addressable market?”

No matter how underserved or neglected, focusing on a too narrowly defined customer base could hurt your business.

If you were to open an import auto dealership in rural Pennsylvania, for example, the number of potential customers would be rather limited. To be successful, you’d need to expand your product offerings to include a larger segment of the market.

A Midwestern coffee company ran into a similar problem. Its founders had an idea to offer a mail-order coffee product. With the coffee industry being somewhat recession-proof, the venture seemed like a sound business decision.

Although the product was branded well and the marketing was on point, there was one glaring problem: The target audience was just too small to support the business. Expanding its product offerings, even by a little, could have improved the company’s return on investment.

But the problems with being too niche aren’t exclusive to new businesses. They can be a burden for an established one as well.

Moving Beyond Your Niche.

A couple of years ago, my company was working with a small landscape and lawn care business. Like anyone in this trade, the owners offered consumers snow removal during the off-season — a venture that had served them quite well. Business was growing, and they wanted to continue down this path.

After some interviews and market research, our team identified an untapped market. No one in the area was offering a bug-spraying service to consumers, so we suggested that the owners add this service to their selection. Not only could they offer it to their current customer base, but it could also bring in new customers.

Unfortunately, they didn’t see value in this idea; within a year, a larger franchise moved into town and captured that market. It began to level out my former client’s customer base and even absorbed a few of its employees who were looking for better opportunities.

3 Signs Your Company Is Too Niche.

In the life cycle of many niche enterprises, there comes a point when you’ve outgrown your market and could be missing out on other opportunities to grow. Here are some signs to watch for:

1. Requests from your current customers.

One of the most obvious signs you need to branch out is a direct request from your current customers. If your customers are asking for additional products or services, explore these avenues. Ignoring common requests could mean you lose business to a competitor.

2. Poor customer retention.

Like outgrowing your market, your customers could be outgrowing you. If your products or services can take users only so far, they may go elsewhere. Look at where you could expand your offerings to retain customers longer.

3. A plateau in market position.

Only so many people fall within a total addressable market. When you’ve captured a healthy percentage of your market, there may be no more room to grow within your niche. If your business isn’t where you want it to be, look for gaps in the market to expand your offering.

Finding your niche is a great way to differentiate your business and build a reputation within your industry. If you’re the best, every company entering this category will be compared to you — a great position to be in.

However, staying too niche can limit your growth, and you may miss out on an untapped market that fits perfectly within your business model. Many companies started out as niche businesses and then expanded into other markets.

After Diapers.com, Marc Lore and Vinit Bharara launched Soap.com, which offers overnight delivery for thousands of home goods such as shampoo, cosmetics, and toilet paper. Lore and Bharara went on to sell their parent company to Amazon for an estimated $545 million.

Does your business need additional products or services to stay competitive and grow? Branching out could help you reach customers who never would have found you before.

Joshua Conran is a senior partner at Deksia, a branding agency that has been successfully developing companies for the past decade. Joshua’s focus is on winning for the client while expanding Deksia into multiple markets by utilizing systems and processes.

Young Upstarts is a business and technology blog that champions new ideas, innovation and entrepreneurship. It focuses on highlighting young people and small businesses, celebrating their vision and role in changing the world with their ideas, products and services.